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Are junk bonds sending an early warning to markets?

While stocks are mildly higher over the past two months, high-yield bonds have fallen by more than 2 percent—and some say that presents an early warning for markets as a whole.

To Larry McDonald, head of U.S. strategy with Societe Generale's macro group, the underperformance of high-yield bonds is a "systemic risk indicator," showing the possibility of instabilities within the financial system.

After all, high-yield bonds tend to track stocks closely. Since they are much more sensitive to concerns about default than most fixed-income products—hence their high yields, and their more colorful "junk bond" moniker—they are much more levered to the business cycle and the state of the economy. That makes them similar to stocks.

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One theory is that "cracks" show in the high-yield market before they appear in the stock market, making divergence between junk bonds and stocks an indicator for where the market is going next. Since junk bonds have been underperforming, the concern would be that stocks are next to fall.

"At the end of the day, the high yield market is less liquid than equities, so traders tend to be quicker with the trigger finger in terms of taking down risk," McDonald said. "That's why credit tends to lead equities."

On the other hand, the recent divergence might also be seen as a neutral or even positive indicator.

"What's really driving [the divergence] is investors looking at a preference for moving out of these income-producing securities," said Erin Gibbs, equity chief investment officer at S&P Capital IQ.

"If you look at the correlations between S&P 500 dividend aristocrats—so all those companies that somewhat act like high-year bonds where they're paying out about 5 percent and have that slightly lower volatility—there's a shocking amount of correlation between the high yield and the high dividend paying companies, and those have been really moving in tandem," Gibbs said.

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"It's the companies that [haven't] been paying dividends that have been moving up within the S&P index, obviously that's a very small amount, but at least they haven't been going down," he added. "So we see a clear preference of investors moving away from income-producing, high-dividend yielding, sort of anything that's income and more on price appreciation."

That is, perhaps investors are moving away from high-yield bonds to stocks, just as they're moving from less-risky stocks to bonds. That would imply a positive view about the market and the economy, rather than a negative one.

Or, more neutrally, the weakness in high-yield products may be seen as a simply consequence of bond yields (which move inversely to bond prices) ticking higher. In fact, the prices of high-yield bonds have held up substantially better than the prices of nearly risk-free US Treasurys.

The big move for bonds could come later on Wednesday, after the Federal Reserve releases its latest policy statement.